Sunday, May 25, 2008

Lehman Selloff Accelerates

The eerily reminiscent slide in Lehman Brothers Holdings Inc. (LEH) picked up steam again on Friday when the stock was down $2.26, or 5.87%, to $36.24 on heavy volume of 28.3 million shares. It was dangerously heading towards its March 52-week closing low of $31.63. Already losing about 16% of its value over the past few trading sessions, the selloff in Lehman is continuing on fears of larger write-downs, and had accelerated intra-day as no one wanted to stay long ahead of a three day-weekend.

The Wall Street Journal noted that on Thursday, Greenlight Capital hedge fund manager David Einhorn spoke at the Ira Sohn Investment Research conference, questioning why the company only wrote down a $6.5 billion collateralized debt portfolio by just $200 million, and also taking issue with large, unrealized gains the firm booked in the first quarter. A known Lehman short seller, Einhorn is not the only one betting on further downside.

In looking at the options market, there is an overwhelming bias towards buying puts, with some tremendous activity in the front month contracts, particularly the out of the money June puts with a strike price of $35, $30 and $22.50 where total volume is in excess of 50,000 contracts. With growing uncertainty surrounding the value of Lehman’s financial assets, the bottom appears to be falling out.